Operating leasing for state-funded schools and academies is a highly specialist area of asset finance. If a school signs the wrong kind of lease documentation the implications can be serious for both the school and leasing company.
When vetting lease documentation, always consider the following aspects of the lease with great care:
Return conditions. This forms part of the contract and must be fair and reasonable to both the leasing company and school. Think about the nature of the equipment, its anticipated use and its probable return at the end of the lease. Are the return conditions sensible and achievable? Terms such as “complete with all original packaging” might be designed to make the eventual return of the equipment difficult. Onerous return conditions are sometimes designed to nudge the school into retaining the equipment at the end of the lease when they might otherwise return equipment. When equipment is not returned and the only option open to the school is to enter into a secondary per rental period which comes at a cost.
What interest rate would you use when working out the net present value (NPV) of the rentals payable? Some leasing companies like Arkle detail the inherent interest rate used in the lease, but some do not. The interest rate used in this calculation will have a major impact on the NPV result.
The NPV of the lease rental stream: This is really important and for the lease to qualify as an operating lease the NPV must be less than 90% of the equipment cost price of the equipment. In some cases local authorities insist on the NPV being less than 85% of the cost price. Arkle suggests you check rules before signing any lease documentation.
Does the lease document show the cost of “Secondary Period Rentals”: The rules are less than clear about this but strictly speaking secondary period rentals ought not to be agreed or documented at the outset of the lease. The inclusion of secondary period rentals at the outset can, in some cases, deem the lease to be a finance lease rather than an operating lease and will make the lease entirely inappropriate for schools or academies.
Will the leasing company provide you with fully completed sample operating lease documents and return conditions for the local authority to consider and approve? If you are unsure never sign a lease without reading all the terms and conditions first, you also may wish to take independent advice from your local authority. In many cases with high value equipment Arkle insists the school takes advice from the local authority before signing Arkle’s documentation. This protects both the school and Arkle.
If you wish to learn more about Arkle’s approach to operating leasing for schools and academies please contact our specialist education team on 01933 304789.